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Trading  | April 19, 2018

One week ago, when we first discussed the upcoming surge in commodity prices – especially aluminum and nickel – following Trump’s latest Russian sanctions, which in turn sent the stock and bond prices of Russian aluminum giant Rusal crashing amid fears the company would be unable to access capital markets now that it has become “radioactive” to western banks, we suggested that it do the next logical thing: “seek funding in China” or approach Beijing as a market that is exempt from US sanctions: after all, China itself has a ravenous demand for the product.

As it turns out, that’s precisely what the company – owned by Russian oligarch Oleg Deripaska -has done.

According to Bloomberg, officials from Rusal, the world’s second largest aluminum producer, met Chinese companies and traders this week to discuss the possibility of buying alumina and selling aluminum in China.

Still, China’s response was lukewarm: after all, Beijing itself is locked in an escalating trade war with the US and the last thing it wants is to infuriate the moustached neocons in the Trump administration by allowing Russian companies to skirt US sanctions.

Rusal’s delegation in China, which includes senior marketing and sales representatives, is discussing potential options but hasn’t reached any sort of agreement and may not do so, according to the people, who asked not to be identified because the matter is private. Chinese officials were cautious about any sort of deal because of the risk of contravening sanctions, the people said.

Furthermore, in addition to finding capital and buyers for its product, Rusal is looking for alternative sources of alumina, the raw material for aluminum, as sanctions block its normal supplies.

At the same time, the company’s asking traders whether it can boost sales of the refined metal in ingot form in China, as its usual customers are cut off. Rusal’s press office declined to comment.

And while Beijing may be able to quietly provide Rusal with funding, China may not be the “all-in” savior Rusal is seeking. As a reminder, the world’s biggest aluminum producer has already been cutting excess capacity, and has been exporting, and in some cases dumping, huge volumes of aluminum products it doesn’t need domestically and exchange warehouses are brimming with record stockpiles. What’s more, its own aluminum industry is being targeted by U.S. trade tariffs.

“It’s understandable that Rusal is looking for a solution from China as the country is the world’s biggest market of the metal,” said Wan Ling, an analyst at CRU Group in Beijing. “We’ll see major concerns from the Chinese side amid the current sensitivity in the global trade environment.”

Meanwhile, the most likely outcome is that as US sanctions persist, Russia’s aluminum output will remain in limbo, which will crippled European procurement, as the continent is Rusal’s biggest buyer…

while sending global supply chain for aluminum  – which is used in everything from planes made by Boeing to Ford trucks to Campbell soup to Budweiser beer cans – in disarray.

And since Rusal supplies about 6% of the world’s aluminum or about 17% of production outside China, and operates mines, smelters and refineries from Ireland to Jamaica, the impact of recent sanctions has sent aluminum prices soaring to the highest since 2011.


Meanwhile, as the world refuses to accept Rusal’s product, the Russian aluminum giant is said to be stockpiling large quantities of aluminum at one of its plants in Siberia, according to Reuters.With the firm’s own storage space filling up with unsold aluminum, Rusal executives in Sayanogorsk, in southern Siberia, have had to rent out additional space to accommodate the surplus stock, one of the sources told Reuters.

Pure aluminium ingots are seen stored at the foundry shop of the Rusal Krasnoyarsk aluminium smelter in the Siberian city of Krasnoyarsk

“Aluminum sales have broken down. And now the surplus aluminum is being warehoused in production areas of the factory itself,” said someone who works on the grounds of one of Rusal’s two plants in Sayanogorsk

Several people connected to Rusal said that Oleg Deripaska, the company’s main shareholder who along with the company was included on a U.S. sanctions blacklist, visited Sayanogorsk this week for a closed-door meeting with staff.

Reuters spoke to a contractor at the Sayanogorsk plants who said the stockpiled ingots, stacked on pallets, were building up fast. He said two days’ worth of production would fill up a five-car train, but already a week had gone by with aluminum piling up.

“Can you imagine a week?” he said. “There’s a hell of a lot there, a hell of a lot. It’s being stockpiled, it’s not being shipped.”

An electrician working for Rusal said the ingots were being squeezed into all available space.

“The storage is not quite full,” said the electrician, who spoke on condition of anonymity to discuss internal company affairs. “Something is still being loaded all the same, some stuff is being shipped.”

* * *

To be sure, the Russian company will hardly give up without a fight: on Tuesday its Hong-Kong traded shares, which had lost more than 60% since the sanctions were announced last week, surged nearly 30% to HK$1.81 on speculation Trump will stop, and maybe roll back sanctions. But until that happens, Rusal is likely to target sales in alternative markets across the Middle East, Turkey and China to make up for lost exports to western markets, Morgan Stanley analysts said.

Finally there is the other wildcard: inflation. As noted above, aluminum and nickel have been driven to multi-year highs as the turmoil unleashed by U.S. sanctions sprads. On Thursday, aluminum surged to the highest level since 2011, trading at $2,668.50 a ton; Goldman forecasts prices could surge to $3,000 in the near term as the impact overwhelms the market and as no new suppliers can ramp up production to take over Rusal’s market share.

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